A High-Rising Exposure

Investors who snapped up
Taylor Morrison Home
Corp.'s
shares when it recently went public might want to start rooting for Toronto to skirt a condo bust.

ENLARGE

A construction site in Toronto where condominium buildings are being built, shown in December.
Reuters

The Arizona home builder is long on Toronto high-rises at an unusually volatile time for real estate in Canada's biggest city. Taylor Morrison, known in the U.S. for its higher-end single-family homes, expects to complete three high-rise projects this year and an additional four in the Toronto area by the end of 2016. The projects are under way as a record 237 condo towers, most taller than 10 stories, are rising in the city and region's skyline, according to RealNet Canada Inc., a real-estate research firm.

Taylor Morrison attracted enough investors to push the company to issue 20% more shares than expected. The shares are up about 6.7% from the initial public offering price, as the company became the latest home builder to tap Wall Street's growing confidence in the U.S. housing recovery.

But the stock's debut also shows the limits of the market's appetite for housing risk. Some analysts say investors' concern over the company's exposure to the frothy Toronto condo market weighed on the stock's pricing right out of the box.

"Taylor Morrison got a haircut because of Canada," said
Jack Micenko,
an analyst with Susquehanna Financial Group, who has a "positive" rating on the stock. Taylor-Morrison shares were at $23.48, down 27 cents, in 4 p.m. trading Tuesday on the New York Stock Exchange. "It's a choppy market."

Other companies in the home-building sector also have seen some recent volatility, though the Dow Jones U.S. Home Construction Index, which tracks public home builders, has risen 61.5% over the past 12 months.

As with many home builders, the outlook for Taylor Morrison has changed considerably in recent years. The company was a unit of British conglomerate
Taylor Wimpey
PLC until early 2011, when a group of U.S. private-equity funds acquired it for nearly $1 billion. The move was seen as an effort by Taylor Wimpey to retreat from the weak U.S. market.

Now the tables are turning. Taylor Morrison's U.S. markets, including some like Phoenix that were among the hardest-hit by the housing crisis, are expected to be its growth engines. In regulatory filings, Taylor Morrison said the average sales price for the company's houses with deposits on them in the U.S. are expected to rise about 20%, to $398,000, in the first quarter from the year-earlier, while in Canada the average sales price was expected to be roughly flat. Closings in the U.S. are expected to rise 96% in the U.S. but decline 33% in Canada.

A Taylor Morrison spokeswoman noted that Canada accounted for less than 20% of the company's net income last year. While the company has seen some generic slowing in Canada, she said much of the problem has been in the luxury condo market, while the company sells condos at a lower price point.

She also said builders in Canada have some legal protections that they don't have in the U.S., such as legal recourse should a buyer who has put down a deposit opt to walk away. That reduces the cancellation rates even if prices fall or buyers get cold feet. "In Miami you had all those people walking from buildings. In Canada you wouldn't see that mass exodus," the spokeswoman said. "There are fundamental differences in Canada that make it a safer place to build high-rises."

The city anchors a region of about five million that also is undergoing some changes that those fearing a condo-bust may not grasp, said
George Carras,
president of RealNet Canada. New land policy is reducing the amount of available parcels for single-family development in the region and pushing developers to build more-dense high-rise projects on remaining land, he said. At the same time, demand is increasing as the city's population rose to about 2.8 million last year.

The number of sales of new high-rise condo units in the Toronto region fell 7.2% in February to 952 from 1,026 a year-earlier, while prices fell 1.3% to 432,000 Canadian dollars (US$421,257), according to RealNet.

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